Car Industries is considering making it\'s own motor castings, which it currentl

Question

Car Industries is considering making it's own motor castings, which it currently purchases for $20.50 per unity. This purchase price does not include the ordering, receiving, and inspection costs, which Car estimates to be $2 per unit. Car feels that it can manufacture the 6,500 required units a lower cost than it pays by purchasing externally. The relevant costs for both the producting and buying alternatives are as follows: Units 6500 Per Unit Cost to Make 6500 Units Cost to Buy ($20.50/unit) Direct Materials $6.25 $40,625.00 Direct labor $10.00 $65,000.00 Variable factory overhead $5.00 $32,500.00 Purchase price $20.50 $133,250.00 Ordering, receiving, and inspection costs $2.00 $13,000.00 $138,125.00 $146,250.00 Assuming that Car's facilities will remain idle if they do not manufacture the casting, Car Industries would increase income by $8,125 per ($146,250-$138,125) by making the component instead of purchasing it. If, however, Car could use the idle capacity to manufacture a new product line instead of producing the motor castings, the contribution margin of hte new product line must be considered as an opportunity cost of the "make" decision. The estimated revenue and cost data for the housings (new product line) are as follows: Units 4,800 Per Unit Sales revenue (4,800 units) $31.25 $150,000.00 Manufacturing Costs Direct materials $10.00 $48,000.00 Direct labor $12.25 $58,800.00 Variable overhead $5.00 $24,000.00 Total $27.25 $130,800.00 Incremental Profit $4.00 $19,200.00 What would be the profit if Car Industries elects to buy the motor castings and manufacture the housings? Car Industries is considering making it's own motor castings, which it currently purchases for $20.50 per unity. This purchase price does not include the ordering, receiving, and inspection costs, which Car estimates to be $2 per unit. Car feels that it can manufacture the 6,500 required units a lower cost than it pays by purchasing externally. The relevant costs for both the producting and buying alternatives are as follows: Units 6500 Per Unit Cost to Make 6500 Units Cost to Buy ($20.50/unit) Direct Materials $6.25 $40,625.00 Direct labor $10.00 $65,000.00 Variable factory overhead $5.00 $32,500.00 Purchase price $20.50 $133,250.00 Ordering, receiving, and inspection costs $2.00 $13,000.00 $138,125.00 $146,250.00 Assuming that Car's facilities will remain idle if they do not manufacture the casting, Car Industries would increase income by $8,125 per ($146,250-$138,125) by making the component instead of purchasing it. If, however, Car could use the idle capacity to manufacture a new product line instead of producing the motor castings, the contribution margin of hte new product line must be considered as an opportunity cost of the "make" decision. The estimated revenue and cost data for the housings (new product line) are as follows: Units 4,800 Per Unit Sales revenue (4,800 units) $31.25 $150,000.00 Manufacturing Costs Direct materials $10.00 $48,000.00 Direct labor $12.25 $58,800.00 Variable overhead $5.00 $24,000.00 Total $27.25 $130,800.00 Incremental Profit $4.00 $19,200.00 What would be the profit if Car Industries elects to buy the motor castings and manufacture the housings?

Explanation / Answer

Calculation of Incremental Profit If Purchased of Motor Castings Purchase Cost of Motor Castings (Including Ordering, receiving & Inspection Cost)         (146,250) Savings of Cost of production of Motor Castings           138,125 Incremetal profit from using Idle Capacity to manufacture New Product (150000 - 130800)              19,200 Total Increment Profit / (Loss)              11,075 Profit of the Car Industries will be increased by $11075.

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